China’s bond market experienced a seismic shift on Monday as the yield on 10-year government bonds fell below the critical 2% threshold, marking a 22-year low of 1.9636%. This historic plunge reflects growing market anticipation that Beijing will roll out aggressive monetary stimulus measures to revive a struggling economy.
The downward trend extended to 30-year bond yields, which dropped to 2.164%, according to data from LSEG. Analysts attribute the rally to expectations of a reserve requirement ratio (RRR) cut for commercial banks, combined with continued liquidity support from the People’s Bank of China (PBOC).
Tommy Xie, head of Asia macro research at OCBC Bank, emphasized the forces behind the rally, stating, “Expectations of a RRR cut, supportive liquidity conditions, and weak economic fundamentals have driven yields lower.” The PBOC’s recent injection of 800 billion yuan into the banking system via reverse repo operations in November—up from 500 billion yuan in October—has further fueled speculation of additional easing measures.
Economic Struggles Shape Bond Market Dynamics
The sharp decline in yields highlights the persistent challenges in China’s economy. Despite signs of stabilization in the property market, broader domestic economic indicators have shown little improvement. “Without meaningful fiscal stimulus, China risks falling into a deflationary trap,” warned Edmund Goh, investment director at abrdn.
China’s offshore yuan weakened by 0.45% on Monday, trading at 7.2795 per dollar, signaling cautious investor sentiment. Meanwhile, the yield gap between Chinese government bonds and U.S. Treasuries remains significant, with U.S. 10-year yields exceeding 4%.
Still, some experts see an opportunity. Eugene Hsiao, head of China equity strategy at Macquarie Capital, noted that the tightening spread between Chinese and U.S. yields could attract equity flows into Chinese markets. “Even though yields are nearing 2%, the narrowing gap with U.S. bonds is a net positive for Chinese equity flows,” Hsiao said.
PBOC Prepares for Further Action
PBOC Governor Pan Gongsheng has hinted at further monetary easing before year-end. Speculated measures include a 25 to 50 basis-point RRR cut and a 20 basis-point reduction in the seven-day reverse repo rate. The central bank’s intervention aligns with expectations for critical policy announcements during December’s Politburo session and the Central Economic Work Conference, where China’s economic blueprint for 2025 will be set.
Despite market optimism, the PBOC has cautioned against speculative bubbles in the bond market. Policymakers are wary of overreliance on government bonds at the expense of diversified investments, balancing the need for economic growth with financial stability.
Trade Tensions and Broader Implications
China’s economic challenges are compounded by renewed trade tensions with the U.S. President-elect Donald Trump’s proposal for a 60% universal tariff on BRICS nations could severely impact China-U.S. trade, exacerbating the already fragile economic landscape.
Interest rate swaps have also signaled market expectations of continued monetary easing, with one-year rates falling to 1.53%, the lowest since mid-2020 during the height of the COVID-19 pandemic.
Market Reactions and Risks
Speculation about stimulus measures has buoyed Chinese equities alongside bonds. The CSI 300 Index gained 0.8%, and the Hang Seng China Enterprises Index rose 0.9% on Monday. Analysts at Zheshang Securities predict further bond-buying by banks, potentially pushing 10-year yields to 1.85% by the Spring Festival in January.
However, the PBOC’s previous interventions to curb speculative excesses remain a stark reminder of the delicate balancing act required to stabilize markets. With economic recovery on the line, Beijing faces mounting pressure to deliver decisive action while maintaining financial equilibrium.